My Issues with Keynesianism

Aggregation
Imagine a public school, where the students are struggling. Test scores are low. Graduation rates are low. This is a problem. What do we do? Well, of course, we just hand the principal a big check and walk away, assured that the problem will now get better. Oh wait. We don’t do that. We look carefully at the school, and try to understand the root causes. We hold people accountable. We adjust strategies, change plans, identify problem areas. We actually work to solve the problem.

Imagine that we have an obesity problem. What do we do? Well, of course, we just dole out money to hospitals, and walk away. Oh wait. We don’t do that. We again attempt to identify the problems. We isolate causes, spend money on education, on labeling, on banning :rolleyes: things that seem to contribute.

But in the world of economics, we get really, really sloppy. We don’t make any attempt at all to identify root causes, eliminate bad programs, change policies. No, we just throw money at random projects, hoping they’ll help. In the worst case, we talk about hiring people to do nothing but dig and fill ditches, because as long as the people have money, “aggregate demand” improves. This is not a grown-up, mature approach to solving problems. This is kissing a boo boo to make it better. And it’s distortionary and short-sighted and, most damningly, incredibly haphazard.

Infrastructure has a multiplier > 1.
I get it, government infrastructure projects can be valuable.
The Hoover dam was built during the Great Depression, and it was (and is) a huge benefit to society. Reducing flooding, creating jobs and generating electricity are all wonderful things.

The Interstate highway system is a huge benefit to society. A worthwhile project that has paid back far more than it cost.

But not all infrastructure projects will have that kind of payout. In fact, arguably, we’ve built all the easy things, and now we’re going to spend more and more, to get less and less benefit. Yes, improving our sewer lines is a good thing. Yes, improving our bridges is a good thing. But that does not mean that those projects have a multiplier > 1. And if someone objects to spending money on projects that have a multiplier < 1, it doesn't mean they want people to starve. It means they want to think carefully about how we spend our finite resources.

Red Tape
Even if I accepted that increasing aggregate demand was a useful task, and that we had lots of useful infrastructure projects with a multiplier > 1, we’re still hosed. Because as we’ve added layers of bureaucracy and rules and committees to our government, in the name of accountability, good stewardship and environmental awareness, we have crushed our ability to pursue projects quickly. Shovel-ready, my ass.

Note that I’m not saying, necessarily, that we should abandon our committees, rules and bureaucracy. But the fact is: they exist, and they suffocate any attempt to build infrastructure in a reasonable time frame. And if the infrastructure can’t be built quickly, it’s not going to stimulate aggregate demand.

Bad Projects
And those projects that we have pursued are often colossal wastes. Look, I get the concept of mass transit. Moving people efficiently where they want to go is a valuable service. If we can make it efficient, and if we can take them where they want to go. The high speed rail projects, the various light rail projects are all disasters. Except for New York City, they are all massive failures on every level – no one uses them, they don’t cover their expenses, and because they run with so few people on them, they aren’t environmentally beneficial.

These are not projects to solve problems. These are monuments that politicians build to show how high-status they are, and make their cities and states seem important and sophisticated. I’ve got news for you: Important and sophisticated do not put people back to work. They do not make the US economy richer. They line the pockets of politically well-connected rich people, who then invest the money on ski trips to the Swiss Alps. Yes. that’s how I want my tax dollars to be spent…

Political Will
The philosophical discipline of Keynesianism is straightforward: The government should spend more when times are bad, and save more when times are good to counteract that spending.
But in the real world, we have a couple of serious problems. First: Times are never good enough. Politicians win when growth is high. If one believes in Keynesian aggregate demand, raising taxes and limiting budgets during growth years will put a damper on growth. Politicians, wanting to remain in office, will oppose anything that puts a damper on growth. Because what if the forecasts are wrong? What if the growth isn’t as robust as expected. Why take that risk? Keep those budgets high and keep that deficit soaring.

Second: When times were good, I never heard liberals saying ‘We should cut government spending to prepare for the next recession’. What I heard was: ‘We should introduce expensive policy X, because they do it in Europe. It’s the right thing to do, and we can afford it.‘ Nothing ever subverts sober pragmatism like a “just cause”.

I wrote this because of this article. Spain doesn’t have a lot of options – they can’t print their own money to inflate their way out of debt, and they can’t force others to loan them money at low rates. Cutting spending and raising taxes to balance their budget is really the only option left. I can see the scenario where this will weaken the Spanish economy. But without resorting to forcing other people to write Spain checks, what is Spain supposed to do?

Okay, Mr. Smarty Pants, what would you do for a country that’s in a recession?
A fair question. I would:

Look for ways to make it easier for small businesses to start and flourish. (i.e. Reduce bureaucracy, reduce red tape, etc

Reduce or eliminate the minimum wage. Yes, people may end up working for less pay than they used to, but at least they’d be working.

Reduce funding for programs and projects that do not have a strong and direct impact on the economy. I like art and bullying prevention, and forest-fire awareness, but given a choice between a long recession and a short reduction in spending on these projects, I know what I would pick. Fiscally, this is mostly symbolic, of course, but I still think it’s a message worth sending. You can always refund them when the budget is more balanced.

Take a really, really hard look at pension obligations. Many of these pensions are ridiculous. Modest reductions there will make some enemies, but will have a meaningful impact on current and future deficits.

Hold people accountable. There are a lot of government projects that ended up as major failures. And almost all of them involve a criminal level of financial negligence – politicians who ignored/punished bad news, inflated good news and/or rewarded campaign donors. They need to be identified, and punished. Pour encourager les autres

Okay, you got me. None of these are likely to “fix” a broken economy in a short time. On the other hand, based on what I laid out at the beginning, “government stimulus” isn’t going to accomplish that either. So really we just have to muddle through. But in my opinion, my recommendations would reduce the muddling time, result in less waste and less boondogledge. (Yes, I made that up).